Suppose you notice that the market is expecting extreme volatility in the returns to GME stock over the next month (30 days). But, you have no particular conviction regarding the direction that GME's stock price is likely to move over that horizon. As a result, you decide to set up a "straddle" portfolio by buying a call option and a put option on GME stock, both of which expire in 30 days. Suppose that the exercise, or strike, price of both options is $12. In addition suppose that the current price of GME stock is $12.50, GME will not pay any dividends over the next month, and that the risk-free rate of interest is 1.3%. Suppose that the price (or premium) that you have to pay today to buy the call option is $1.67.

1. What is the implied volatility of the returns on GME stock, given the $1.67 premium on the call option? (Please express your answer to the nearest hundredth. So, e.g., 12.34 for 12.34%.)

2. Given the information that you have about the options and GME stock, what premium would you expect to pay to buy the put option today? (Hint: Consider the put-call parity formula. Please express your answer to the nearest cent.)

3. Suppose that the price of GME stock today were $14 instead of $12.50. Would you expect the premium that you would have to pay to buy the call option today to be higher or lower than the $1.67 premium on the option when the current stock price is $12.50? Likewise, would you expect the premium that you would have to pay for the put option to be higher or lower than the premium that you calculated in the prior question? (No additional calculations are necessary for this problem, but you must provide a clear explanation for your answers.)